A joint business, energy and industrial strategy (BEIS) and work and pensions select committee into the collapse of Carillion earlier this year held an evidence session with three large institutional investors: Kiltearn Partners, Aberdeen Standard Investments, and Blackrock.

MPs heard that the companies had a number of concerns about Carillion’s finances well before its profit warning in July of last year. Issues identified included the company’s attitude to maintaining a high level of dividend payments, and its ability to collect monies owed, as well as its cash flow situation.

Rachel Reeves, chair of the BEIS select committee, said: ‘I am normally more of a fiction reader rather than a non-fiction reader, and to me KPMG’s accounts seem like fiction, and were not a true representation of what was happening in the business.’

Reeves asked the three shareholder representatives whether the apparent disparity between the figures reported in the accounts and Carillion’s collapse with just £29m of cash available would influence how they looked at KPMG’s auditing in the future, and whether they would take a more sceptical approach.

In response, Murdo Murchison, chair of Kiltearn Partners, said he was writing letters to two other listed companies in which his firm had investments and which have KPMG as auditors, asking the audit committee whether they had confidence in the quality of service they received.

Murchison referred to Carillion board minutes seen by the committee, which showed that Emma Mercer, who was appointed CFO in September 2017, had advised Carillion managing director Adam Green that she had identified some issues with which she was not comfortable within six weeks of taking on the role of finance director for the construction business following her return from the company’s operations in Canada.

‘I was puzzled how six weeks into the job someone could discover issues with contracts which had been approved by the auditors, although subsequently described as “sloppy”. It would appear that these issues were hidden in plain sight but not evident to management, which added to the puzzle,’ Murchison said.

Euan Stirling, global head of stewardship and ESG investing at Aberdeen Standard Investments, likened Carillon’s accounts to a ‘mystery novel’.

‘As you read the accounts, so another clue pops out. I share the concerns expressed over the audit profession.  Lack of competition leads to very difficult positions for companies when there is a mandatory rotation exercise and finding an appropriate choice can be a difficult thing to do,’ Stirling said.

Later in the session, MPs heard evidence from restructuring specialists at EY, who were brought in following the July profit warning. They suggested there were some £150m of cost cutting options which had been overlooked, while problems with the integration of the companies acquired to form Carillion and a lack of investment in data analysis meant management had an incomplete view of operations.

EY’s team, which was paid £10.8m for restructuring work, reported feeling ‘uncomfortable’ with the level of financial foresight and business planning at the company.

Report by Pat Sweet